ARIZONA CORRECTIONAL INDUSTRIES A n n u a l R e p o r t - F Y 2 0 0 8 Mission Statement To create opportunities for inmates to develop marketable job skills, civility and good work habits through successful enterprises that produce quality products and services for our customers. Dear Director Ryan: I am pleased to present the Arizona Correctional Industries Annual Report for Fiscal Year 2008. ACI achieved record revenues in FY 2008, increasing sales 5.3% to $28,664,556. Inmates worked a total of 3,213,076 hours in ACI programs. Labor Contracts alone increased inmate programs to over 2.1 million hours worked. ACI’s Net Income was $619,727, or 2.16% of Total Revenue, compared to $649,873 in FY 2007 – 2.39% of sales. Net Income has decreased due to rising raw material prices, fuel prices, and an increase in Correctional Officer costs to ACI owned and operated shops. ACI work programs enabled male and female inmates to contribute $7,522 to the Victim’s Compensation Fund, and $30,253 was deducted for court ordered dependent support. $1,628,919 was deducted from their wages for room and board, and that amount was returned to the State of Arizona General Fund. Court Ordered Restitution deductions totaled $329,140. Total deductions were $2,036,915, or 29% of the $7,141,496 wages paid to inmates. In fiscal year 2008, ACI marketed over 3,800 products to 1,707 customers. Each labor contract averaged $484,424 in annual revenue, and the owned and operated shops averaged $32,206 annually per customer. ACI has 85 full-time staff, 3 part-time and 45 security officers dedicated to insuring that the male and female inmates working for ACI are receiving opportunities that will help prepare them for their return to the community. Bill Branson General Manager Arizona Correctional Industries Inmate Hours Worked 3,500,000 3,000,000 2,500,000 1,079,625 1,187,580 1,225,345 2,000,000 1,500,000 1,000,000 1,963,423 1,786,868 2006 2007 2,133,452 500,000 0 Labor Contracts 2008 Owned and Operated Inmate Hours Worked In fiscal year 2008, inmates worked 3,213,076 hours in ACI enterprises. This represents a 6.7% increase over the previous year. Labor contracts accounted for 66% of the hours worked, an increase of 19.4%. The increase was mostly due to expansion of existing programs. FY 2008 contracts and hours worked are: Eurofresh – Wilcox Televerde Safety Services Hickman Eggs Greater Auto Auction MVD CME – West Eurofresh – Snowflake CME – East Fiesta Canning Company, Inc. LBJ Farms 436,676 323,815 322,710 168,288 140,181 167,639 117,528 91,411 66,375 58,006 56,536 AZ Trailer Manufacturing Cargill, Inc. Southeast AZ Medical Center ESB Modular Manufacturing Duncan Family Farms Morrison Management Farmer’s Investment Company H & H Trailer Manufacturing American Curb & Vent AZ Cotton Research Council Crothall Service Group 54,571 39,362 31,772 22,049 18,439 17,920 15,087 9,801 7,753 4,520 4,013 The ACI Owned and Operated shops had the following programs and inmate hours worked in FY 2008: Bakery Division Metal Fabrication Division Douglas Sewing Division Sign and Graphics Division Print Shop & Copy Center Furniture Shop Perryville Sewing Division Wood & Metal Refurbishing Southern Warehouse Operations Industrial Yard Operations Upholstery Division 189,825 122,346 102,598 89,628 82,727 54,522 51,232 49,561 43,449 37,897 32,297 License Plate Division Bedding Division Consumer Products Division Agriculture – Farm Division Commodity Products Division Central Office Operations Industrial Maintenance Installation Group Data Fulfillment Center Transportation Division 31,179 30,419 29,539 26,656 24,399 24,279 19,995 16,512 11,589 6,138 ACI Quality Program ACI continues to see a positive financial impact from the quality program that was implemented in 2004. ACI has nominated two Owned and Operated shops for the Arizona Quality Alliance Award for 2008. The Bakery and the Print Shop are two of ACI’s most conscientious shops when it comes to quality and customer service, and will receive on-site visits from the AQA auditors mid to late October 2008. We have developed key metrics for each ACI operation, and continue to track customer satisfaction each month. ACI surveys customers and the results are analyzed and changes to the processes are made accordingly. Customer satisfaction averaged 98.8% in FY08, with only 1 month achieving less that 95%. This was an increase from 95.4% in FY2007. On-time delivery was 98.6%, an improvement from 95.4% in FY2007. Customer Satisfaction/On-Time Delivery FY2008 101% 100% 99% 98% 97% 96% 95% 94% 93% 92% 91% Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Customer Satisfaction Feb-08 Mar-08 Apr-08 May-08 Jun-08 On-Time Delivery Sector Trends Within the Owned and Operated shops, Arizona State Agencies represent the largest customer sector. Due to reduced State revenues, many agencies have limited spending; however the total number of agencies buying from ACI has increased, so the overall result is a slight 3.8% increase. Prison growth has helped the ACI Bakery to increase sales by 7.4%, but margins have fallen due to increased wheat prices. Sales to the Department of Corrections have decreased 23.6% over the past fiscal year. The sector titled General represents sales to private sector companies, not for profit companies, and private citizens. This group has increased 6.25% over the previous year. Sector Trends $7,000,000 $6,000,000 S A $5,000,000 L $4,000,000 E S $3,000,000 Dept of Corrections Bakery Counties, Cities, Towns State Agencies $2,000,000 General $1,000,000 $0 2003 2004 2005 2006 Fiscal Year 2007 2008 Owned and Operated Shops The Owned and Operated shops generated Revenues of $15,833,022. These are shops that are managed by ACI Staff, and in most cases, ACI security staff. Net Income for the shops was $1,284,943. The ACI Bakery and License Plate Operations account for nearly half of the revenue (46%). The Metal Fabrication Shop achieved sales of $1,574,319, during a year when there was no prison construction. Strong partnerships with the private sector helped replace sales that traditionally came from new prison construction. The Owned and Operated shops still contribute a larger percentage of ACI sales than Labor Contracts. ACI Management believes it is important to continue growing the owned and operated shops because it creates a revenue balance with the Labor Contracts. It takes a greater capital investment to start or expand Owned and Operated businesses, but it also gives ACI more control over product and production. Revenue Sources $20,000,000 $18,000,000 $16,000,000 $14,000,000 $12,000,000 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $0 2003 2004 2005 Labor Contracts 2006 2007 2008 Owned and Operated Labor Contracts In fiscal year 2008, ACI Labor Contracts increased 32% to $12,783,440. Net Income increased by $1,120,410. In FY07 1,173 inmates were employed with ACI labor partners at 28 locations both inside and outside the prison facilities. This sector is expected to continue to increase and provide ACI with the greatest opportunity for future growth. ACI labor partners are involved in agriculture, service, and manufacturing. Agriculture represents 37% of the total inmate hours worked in labor contracts. In the service sector ACI labor partners such as the Arizona Motor Vehicle Department, are involved in telemarketing call centers. This sector represents 36% of the total inmates hours work in labor contracts. Service industries overall amount to 53% of the total labor contract hours, and manufacturing represents 10% of the total labor contract hours. Cash Flow Requirements One of the biggest challenges facing ACI is maintaining adequate operating cash. By Statute, ACI is unable to establish banking relationships where lines of credit, factoring receivables, and other loan products are available for small businesses to help balance large swings in cash. ACI requires about $2 million in operating funds, and often, untimely sweeps of cash reserves impact daily business operations. ACI has been put in the position of delaying the purchase of capital equipment that helps productivity and profits, because the cash reserves are minimal. Also, low cash reserves inhibit ACI’s ability to take advantage of competitive prices for raw materials. In today’s volatile market, it’s not uncommon to see swings of 15%-20% in the price of wheat, steel, or fabric. Without adequate reserves, we are forced to forfeit those opportunities to make wise and timely purchases of raw materials. Arizona Correctional Industries Net Income and Transfers $2,500,000 $2,000,000 D O $1,500,000 L L $1,000,000 A R $500,000 S $0 1998 1999 2000 2001 2002 2003 2004 2005 2006 ($500,000) Fiscal Year Net Income ADC\General Fund ACI Capital Assets 2007 2008 STATE OF ARIZONA DEPARTMENT OF CORRECTIONS ARIZONA CORRECTIONAL INDUSTRIES Statement on Net Assets-Enterprise Fund Year Ended June 30 Assets Current Assets: Cash in Bank and on Hand Cash on Deposit with State Treasurer Accounts Receivable net Interest Receivable Inventories Prepaid Expenses Total Current Assets Noncurrent Assets: Capital assets, not being depreciated Capital assets, being depreciated, net Total Noncurrent Assets Total Assets 2008 $ 135,079 956,447 4,437,026 5,943 3,405,653 128,364 9,068,512 2007 $ 206,455 1,675,121 3,848,140 19,593 3,413,154 127,730 9,290,193 692,438 2,952,074 3,644,512 12,713,024 692,438 2,595,071 3,287,509 12,577,702 230,979 816,165 256,160 103,280 41,309 433,292 1,881,185 420,330 325,167 242,925 142,088 486,448 1,616,958 Liabilities Current Liabilities: Accounts Payable Accrued Payroll and Employee Benefits Accrued Compensated Absences Current Obligations Capital Lease Deferred Revenue Other Accrued Liabilities Total Current Liabilities Long Term Liabilities: Obligations Capital Lease Total Long Term Liabilities 282,940 282,940 Net Assets: Invested in Capital Assets Unrestricted Total Net Assets $ 3,644,512 6,904,387 10,548,899 - $ 3,287,509 7,673,235 10,960,744 STATE OF ARIZONA DEPARTMENT OF CORRECTIONS ARIZONA CORRECTIONAL INDUSTRIES Statement of Revenues, Expenses, and Changes in Fund Net Assets - Enterprise Fund Year Ended June 30 2008 Sales Cost of Goods Sold Gross Profit $ Operating Expenses Selling General and Administrative Total Operating Expenses Operating Income Nonoperating Revenues (Expenses) Investment Income Net (Loss) Gain on Disposal of Equipment Net Nonoperating Revenues Net Income Transfers out to other state funds $ 763,722 2,649,210 3,412,932 560,476 49,094 20,809 69,903 85,532 3,865 89,397 590,433 649,873 (194,004) (411,845) Total net assets, July 1 455,869 10,960,744 $ 27,144,036 23,170,628 3,973,408 830,333 2,600,450 3,430,783 520,530 (1,002,278) Increase (decrease) in net assets Total net assets, June 30 28,610,941 24,659,628 3,951,313 2007 10,548,899 10,504,875 $ 10,960,744 STATE OF ARIZONA DEPARTMENT OF CORRECTIONS ARIZONA CORRECTIONAL INDUSTRIES Statement of Cash Flows - Enterprise Fund Year Ended June 30 2008 Cash flows from operating activity: Receipts from customers Payments to suppliers for goods and services Payments to employees Payments to inmates Net cash used for operating activities $ Cash flows from noncapital financing activities: Cash transfers to other state funds Net cash provided (used) for noncapital financing activities 28,022,056 (11,746,285) (7,613,809) (7,929,725) 732,237 2007 $ 26,415,740 (13,138,974) (6,907,945) (6,937,621) (568,800) (1,002,278) (1,002,278) (194,004) (194,004) 282,940 20,809 (872,852) (569,103) 3,865 (664,050) (660,185) Cash flows from investing activities: Interest received on investments Net cash provided (used) by investing activities 49,094 49,094 85,532 85,532 Net (decrease) in cash and cash equivalents (790,050) Cash flows from capital and related financial activities: Obligations capital lease Proceeds from sale of capital assets Purchases of capital assets Net cash provided (used) for capital and related financing activities Cash and cash equivalents, July 1 Cash and cash equivalents, June 30 (1,337,457) 1,881,576 $ 1,091,526 3,219,033 $ 1,881,576 STATE OF ARIZONA DEPARTMENT OF CORRECTIONS ARIZONA CORRECTIONAL INDUSTRIES Statement of Cash Flows - Enterprise Fund Year Ended June 30 2008 Reconciliation of operating income to net cash provided (used) for operating activities: Operating income Adjustments to reconcile operating income to net cash provided (used) for operating activities: Depreciation expense Net changes in assets and liabilities: Accounts receivable Inventories Prepaid expenses Accounts payable Accrued compensated absences Accrued payroll and employee benefits Other accrued liabilities Net cash provided (used) for operating activities: $ $ 520,530 2007 $ 560,476 515,847 464,430 (575,235) 7,502 (635) (189,352) 13,235 490,999 (50,654) 732,237 (733,607) 13,962 (46,981) (908,302) (20,325) 208,197 (106,650) (568,800) $ 2008 ACI Recognition Awards Awards are based on sales revenue, profitability, and performance improvement over previous fiscal year. Platinum Award License Plates Labor Contracts Gold Award Bakery Metal Fabrication Signs and Awards Sewing Douglas Sewing Perryville Silver Award Bedding Bronze Award Farm Florence Upholstery Copy Service Employee of the Year Nick Angel ACI Operations By Location Arizona State Prison Complex—Florence ACI Metal Fabrication Factory ACI Farms ACI Bedding Factory ACI Upholstery Shop ACI Operations Administration ACI Wood and Metal Refurbishing ACI Transportation Division ACI Prison Retail Outlet Store LBJ Farms Hickman Egg Ranch ACI Consumer Products Division ACI Industrial Maintenance ACI Central Warehouse Operations Cargill Animal Nutrition Arizona State Prison Complex—Perryville ACI Graphic Arts Division ACI Installation/Support Services ACI Garment Factory Motor Vehicle Division Call Center Hickman’s Egg Ranch Morrison Management Specialist Greater Auto Auction Crothall Services Group Televerde Duncan Family Farms Arizona State Prison Complex—Tucson ACI Sign/Office Products Factory Motor Vehicle Division Call Center ACI Bobbin Operation Farmer’s Investment Company LBJ Farms Arizona State Prison Complex—Lewis ACI Furniture Shop Common Market Equipment Company Hickman’s Egg Ranch American Curb and Vent Arizona Trailer Manufacturing Greater Auto Auction Arizona State Prison Complex—Winslow ACI Commodity Products Manufacturing Eurofresh Arizona State Prison Complex—Douglas ACI Garment Factory Fiesta Canning Arizona State Prison Complex—Eyman ACI Bakery Operations ACI License Plate Factory Arizona State Prison Complex—Safford/Fort Grant Eurofresh Arizona State Prison Complex—Phoenix West Arizona State Prison Complex—Yuma Safety Services Co. Arizona State Prison Complex—Marana ESB Modular Manufacturing ACI Central Administrative Office ACI Copy Service ACI Central Office Operations ACI Data Fulfillment ASP – Kingman H&H Trailer Co. CONTACT US: Arizona Correctional Industries 3701 West Cambridge Ave. Phoenix, AZ 85009 602 272-7600 www.aci.az.gov General Manager Bill Branson Controller Dale Beatty, CPA Labor Contracts Richard Selapack Central Region Bill Foster West Region Gregg Hillebrand East Region Al Wesley Department of Corrections Sales Christine Lansford Work Based Education Glen Davis Quality Management Judi Longmeyer